Money-Saving Tip: Know Your Production Cost

Editor's note: We’ve gathered several experts to offer suggestions on trimming expenses in light of tighter margins in 2014. This is one of 10 money-saving tips.

It’s no secret that profit margins are getting tighter. After a year of struggling crop prices, USDA predicted last month that 2014 won’t be much better, with average prices for corn, soybeans and wheat dropping lower than in 2013.

In his annual Outlook for U.S. Agriculture, USDA Chief Economist Joe Glauber anticipates an average U.S. corn price of $3.90, down from the 2013 average of $4.50; an average soybean price of $9.65, down from $12.70; and an average wheat price of $5.30, down from $6.80.

You can’t control the market, but you can control your expenses. Knowing your cost of production not only allows you to trim costs, but also when to lock in profit opportunities—and therefore, weather a challenging year.

While this is hardly new advice, many producers still do not have a firm grasp of their total costs, says Danny Klinefelter, ag economist at Texas A&M University. It’s not enough just to know costs on a cash basis, which can give you an inaccurate picture of farm finances; it needs to be done on an accrual basis, he explains. "Probably only 2.5% of commercial farmers know their cost of production on an enterprise basis," he adds.

"It’s impossible to market and lock in a positive margin if you don’t precisely know your costs," says Mike Boehlje, ag economist at Purdue University. "When you see a profit opportunity, lock it in."

Likewise, it’s tough to know just how to go about trimming costs without precisely knowing what they are, he notes.

Account for Value

"Cash rents, equipment, seed and fertilizer are among the most costly individual line items. Collectively, these four items can easily make up 80% of your production costs," he says. "The challenge is to distinguish the difference between additional costs to your farm and understanding the value that comes back to your operation."

Accounting for value is also important when it comes to marketing.

"It’s critical to analyze and measure your expenses at a high enough level so that you don’t underestimate the price you need to cover all your expenses," Barron says.

Download these interactive spreadsheets, courtesy of Chris Barron, to help you analyze your operation’s production costs: